Implementing Enterprise Risk Management
at MOL Group
- a case study -
Péter Sáling
Group Risk Management
MOL –Hungarian Oil & Gas Company
Palisade User Conference
London,
April 23-24, 2007
Agenda
Introduction of MOL Group and the evolution of risk management
Mapping, measuring and reporting Financial, Operational and Strategic risks at
Group level
Risk Simulation and Risk Reporting with ERM Model
How to use Enterprise Risk Management (ERM) results in key decision making
processes (i.e. capital allocation, KPIs, strategic planning)
Introduction of MOL Group
and the evolution of risk management
MOL is a leading Central European integrated oil and gas
company…
►
One of the best performing integrated energy
companies in the region
►
Leader in core markets of Hungary, Slovakia
and in Croatia via INA
Operational integration
UPSTREAM
►
State of the art asset base serving a high growth
downstream region
►
Highly successful regional partnerships:
Slovnaft (it was one of the first successful
cross-border acquisition and integration in CEE),
TVK (petrochemicals) and INA
►
►
►
►
Several years of significant efficiency
improvement was the major basis of good
financial performance
First national oil and gas company in
Central and Eastern Europe to be privatised
Shares listed on Budapest, Warsaw and
Luxembourg Stock Exchanges and
traded on IOB (London)
Capitalization of the company is above
13 Bn USD
Gas
Transmission
E&P
DOWNSTREAM
R&M
Petrochemicals
Slovnaft ( 98.4 %)
TVK ( 94.9%)*
INA ( 25.0%+1 share)
*direct and indirect influence
6%
Shareholding structure
(approx., April .2006)
Hungarian State
OMV
BNP Paribas
Magnolia Finance Ltd
International Institutional Investors
Domestic or domestic depositary
12%
10%
8%
5%
59%
4
Such a complex organisation as MOL with diverse activities and
geographies requires a consolidated risk management function
The new Group Risk Management (GRM) organisational unit
established in January, 2006
Chairman
Acc&Tax
GCEO
„
Business unit managing directors
GCFO
E&P GT
R&M
„
Ret
L
„
PC
„
Treasury
P&C
Group risk
management
Credit mgmt
Liquidity mgmt
Capital markets
Analytics
group
Insurance
Upstream risk
controller
Subsidiary mgmt
Market risk
Downstream
risk controller
„
Current „Risk management”
group is moved from Treasury to
„Group Risk Management”
Risk controller is a new function
with each controller assigned to
multiple business units
Prepare monthly, quarterly and
annual risk reporting to senior
management and Audit
Committee members
Ensure risk quantification metrics
are integrated within core
decision making processes (i.e.
strategic review process, capital
allocation)
Ensure that mitigation activities
and best practice knowledge is
optimised across business units
ERM modelling
Group Risk Management directly reports to the GCFO
Previously Risk Management (dealing mainly with market risk and insurances) belonged to the Treasury
The GRM function has 3 main tasks but must also ensure that
support for Group and BU decision-making is considered
MOL Group Risk Management overview
Financial Risk Management
(transactional)
Process Steps:
ƒ Prepare financial risk
management strategy, policy
–
Collect and review data
–
Review of financial risk,
sensitivity analysis
–
Define limit and strategy
ƒ Hedge proposals, analyse deals
–
–
Initiate hedge transactions
based on risk management
model (To be executed by
Treasury)
Insurance
Risk Measurement & Reporting
(transactional)
Process steps:
(consolidated – financial, strategic and operational risk management)
ƒ Risk retention analysis
Process steps:
ƒ Define insurance renewal
strategy
ƒ Measure, model and analyse risks
–
Collect and review market and plan data for
financial risks (price, volume, premise, mark to
market)
–
Compile market analysis and proposals
(monitor market, premise, select interest
period)
–
Collect probability and impact data on
Strategic and Operational risks from risk
owners
–
Model (integrate data into model, run CF@R)
–
Update risk pyramid
ƒ Manage insurance renewal
across all insurance products
for MOL Group (property
damage, business interruption,
liability insurance)
ƒ Control insurance broker
ƒ Manage captive insurance
company (MOL Re)
ƒ Assist BUs in claim handling
Initiate hedge transactions
based on coordination with
business unit (To be
executed by Treasury)
–
Analyse the hedging of
transactions
–
Compile business proposal
ƒ Compile report
New roles due to
implementing
Enterprise Risk
Management at MOL
–
Give information on completed transactions
(approver, client)
–
Prepare monthly report (for management, for
each AC) on financial risks
–
Prepare quarterly report for BU management,
EB, Audit Committee on all risks
–
Make proposals to EB and BU management
Mapping, measuring and reporting
Financial, Operational and Strategic risks
at Group level
Spread of Risk Awareness Culture
Implementation process of Enterprise Risk Management has already significantly increased risk
awareness culture in MOL Group…
More than 50 interviews with
senior management and
experts of the Business Units
Not only MOL, but its subsidiaries (TVK, Slovnaft) were involved in the process.
At least 2 workshops with each Business Unit (kick-off, final validation, and in some cases
additional mid-term validations also)
During the interviews, discussions and workshops Group Risk Management explained in details
the importance of Risk Management.
In the process of Business Continuity Management (i.e. elaboration of Crisis Management and
Contingency Plans) further experts are involved.
…further improvement expected as risk measurement, reporting and regular discussions about
mitigation actions become part of the „standard” work of senior management, responsible risk
owners and field experts.
Scope of Enterprise Risk Management (ERM) is grouped
around three key areas
Human capital
Corporate reputation
Market risk
Financial
risks
Decrease in market volume
demand
Credit risk
Decrease in market share
Operational cash flow
Price erosion
Facility disruption
Impact on
Shareholder
Value
IT system breakdown
Criminal activity
Increasing costs
Success of acquisitions
Long term crude supply
disruption
Logistic disruption
Environmental accidents
Strategic
risks
Operational
risks
Changes in regulatory
environment
Split of financial risks into underlying risk drivers (risk
pyramid)
- example of a Business Unit,
can be different for other
divisions -
As financial risk (especially market risks) are the most „obvious” for being subject of measurement and mitigation,
methodologies for these are the most „mature”
Split of operational risks into underlying risk drivers (risk
pyramid)
- example of a Business Unit,
can be different for other
divisions -
Backup
Explanation of some operational risk types and parameters to
be quantified
- example of a Business Unit,
can be different for other
divisions Risk types for
quantification
Examples (risk drivers)
Potential parameters to discuss
Facility disruption
Fire in a unit
Loss of utilities
How many days breakdown does have
a significant impact to the Division's
result?
Environmental accidents
Because of flash flood Danube will be
contaminated
Number of events, probability and
effects
Logistic disruption
Lack of material or lifting capacity
causes shortfall in production and
sales
Number of events, probability and
effects, how many days are critical
IT and telecom system
breakdown
Because of non-operating IT system
customers have to be refused and we
loose market share
Number of events, probability and
effects
Criminal activity
White collar criminal activity in
contracting
Blue collar criminal activity in
production or supply
Number of events, probability and
effects
Split of strategic risks into underlying risk drivers (risk
pyramid)
- example of a Business Unit,
can be different for other
divisions -
Backup
Explanation of some strategic risk types and parameters to be
quantified
- example of a Business Unit,
can be different for other
divisions -
Risk types for quantification
Examples (risk drivers)
Potential parameters to discuss
Adverse government
actions
To hike the environmental protection
fee by government
Probability, % of hike
Decrease in market share
Illegal copying MOL's product
Loss in market share, volume
Price erosion
Due to bad positioning or strong
competition we loose market
Loss in market share, volume
Increasing costs
Our cost structure is more rigid than
our competitors'
Loss in margin
Decrease in market volume
demand
Shrinking market causes higher costs
Loss in margin, volume
A detailed overview of the entire model is accompanied by
specific directions for its key functionality
Overview of MOL risk model
Inputs
Baseline
calculation
Calculations
Outputs
A
Premises
ƒ Used to
compute the
baseline
ƒ Worksheet
name
‘Premises’
B
D
BU input data
ƒ 1 per BU
ƒ Data received by
P&C from each BU
for top-down model
ƒ Worksheet name:
BU_Input_<BU>_<
Division>
C
E
Summary of BU input
Baseline cashflow
ƒ Develops cashflow statement per
BU
ƒ Computes fixed items of the cash
flow statement that are not be
shocked
ƒ Worksheet name:
‘BaselineCF_<BU>’
ƒ 1 per BU
ƒ Aggregates data received from
MOL
ƒ Worksheet name:
‘Summary_<BU>_<Division>’
Top Down
P&C input
ƒ 1 per BU
ƒ Used to compute
the baseline
ƒ Worksheet name:
‘TopDown_<BU>’
Input data is
shocked with risk
driver inputs
Fixed items included
within risk adjusted
cashflow
J
BU & MOL cash flow
@ risk outputs
4,0%
3,0%
2,0%
1,0%
Risk
adjusted
calculation
0,0%
(13)
F
Risk driver
inputs
ƒ Allows for easy
changes to the
input and probability
parameters
ƒ Worksheet name
‘Strat/OpRisk_Input
_<BU>’
G
Risk calculation worksheet
ƒ 1 per risk
ƒ @Risk simulations calculate
shocks to BU input data
ƒ Worksheet name: ARM_<Risk
Name>
H
Risk adjusted summary
of BU input
ƒ 1 per BU
ƒ Applies risk calculations to gathered
input data over ten year forecast
period
ƒ Worksheet name:
‘Summary_<BU>_<Division>_
@risk’
I
Risk adjusted cashflow
ƒ 1 per BU
ƒ Develops risk adjusted cashflow
statement
ƒ Worksheet name :
‘Riskadjustedcashflow_<BU>’
(11)
(9)
(6)
(4)
(1)
1
3
6
8
Hu
BU & group reporting outputs
F
ƒ EBIT, EBITDA, operating and free
cashflow distributions
ƒ Driver analysis of strategic,
financial and operational risks
ƒ Worksheet name:
‘RM_Report<BU>’,’RM_ReportGP’
To quantify overall risks, probability distribution and impact on
cash flow for each relevant risk drivers should be identified
Probability %
Most likely
outcome
Probability
distribution
Parameter
Impact’s
„location”
Impact on
cash flow
Sales
Operating
income
COGS
Taxes
Energy
Other
costs
With the assistance of BUs’
management expert input on this
curve and its evolution over time
Metric that measures impact on
Cash Flow
Operating
CF
Free Cash
Flow
Personnel
Main
risk
Driver
chosen
Transport
cost
Working
capital
Capex
Investing
CF
€
Impact on
cash flow
With the assistance of BUs’
management expert input on this curve
and it’s evolution over time
Parameter
Correlations
With the assistance of BUs’ management
opinion on correlations between drivers
and/or main risk where required
Backup
Risk Quantification Methodology – A relatively straightforward
process with active participation of the Business Units
Information required / Activities
Step 1
Identify all material risk
drivers
• Industry analysis, management interviews
• Validated group risk pyramid showing main risks and
drivers
• Main risks with impact on financial metrics chosen
Step 2
Step 3
Step 4
Selection of quantification
path
Estimate probability of the
drivers
Assess impact of drivers
• Quantification paths defined for main risks
• Relevant correlations defined
• Use historical data to provide basis for discussion and
support findings
• Gather management opinion on selected
parameters
-
Define probabilities
-
Define impact on cash flow (or other chosen metric)
-
Define correlations
• Risk modelling tool used to generate risk exposure
distributions
Step 5
Simulate on cash flow
• MOL planning and controlling data serves as the baseline for
the calculations
• Aggregation of all risks and business units occurs through
definition of correlation
Quantification results (example: one of the operational risks –
„Facility disruption”)
- Illustrative Business interruption
period for 2006
Facility disruption – Risk drivers
1.Equipment Breakdown
x
Production loss per day
P&L forecast statement
Production
lost per day
Forecast 2006 – 2015
Inputs:
„
Volumes & prices – Product, Raw
Material, Transportation, Utilities
Outputs:
„
EBIT, EBITDA, Operating Cashflow,
Free Cashflow
„
Full facility shutdown
20%
0,2
10%
0,1
0
Number of equipment breakdowns
in 2006
20%
Key unit
shutdown
BU cash flow volatility
5,0%
x
days
y
days
Z
days
Interruption period
years
3,0%
2,0%
1,0%
0,0%
2. Natural Disasters
39
9)
04
0)
(6
81
)
(3
22
)
(1
Similar BI event distributions prepared
for other facility disruption risk drivers
and combined with the Production loss
per day
37
39
6
75
5
1
11
5
1
47
4
1
83
3
Free cash flow BN HUF
3. Loss of Power
5. IT System Breakdown
Operational risk only
4,0%
Number of interruption days
per event
4. Loss of Gas and Steam
– Illustrative –
Probability
(1
1,2
1
10%
0,8
0,6
0,4
0,2
0
Financial Impact
=
ƒ Mitigating effect of insurance programs is
incorporated within the risk adjusted
cashflow calculation
Political risk modelling –using Global Insight for inputs
RUSSIA
Oil & Gas Upstream
(Risk = a loss in real return in US$ terms)
Immediate Risk Sources by Type
Investment/Maintenance Risk:
(8)
(10)
(12)
(14)
(28)
(29)
(32)
(4)
(5)
(8)
(14)
(19)
(23)
(28)
(29)
(30)
(31)
(33)
(8)
(12)
(15)
(32)
(3)
(8)
(13)
(26)
(27)
(29)
(30)
(32)
(2)
(8)
(16)
(17)
10
5
10
10
5
5
15
25
5
5
5
10
10
15
25
66
80
14
35
50
45
20
0,1
0,1
0,2
0,3
0,3
0,4
0,2
0,9
0,3
0,2
0,1
20
15
25
40
15
12
34
11
0,8
0,5
2,1
1,1
10
15
10
5
20
25
5
10
14
15
25
52
25
35
50
11
0,5
0,8
0,9
0,9
1,8
3,1
0,9
0,4
40
35
20
5
8
15
14
38
0,3
0,5
0,3
0,2
100
Selected events from immediate risk
scores that GI assumes are relevant for
oil& gas
4
3
4
9
10
Corporate Taxes
Enforceability of Government Contracts
Transferability of Funds
Real Currency Depreciation (vs. US$)
Overall Risk Score
0,8
1,9
0,2
0,3
0,1
0,4
0,3
35
Export Taxes
Enforceability of Government Contracts
Regulations -- Exports
Domestic Demand
Export Disruption (Sanctions/Trade Conflict)
Infrastructure Disruption or Shortage
Losses and Costs of Corruption
Losses and Costs of Physical Hazards
Revenue/Repatriation Risk:
15
27
12
25
14
35
11
25
Enforceability of Government Contracts
Regulations -- Environmental
Regulations -- Other Business
Losses and Costs of Physical Hazards
Sales Risk:
25
35
10
5
5
5
15
10
Import Taxes
Labor Taxes
Enforceability of Government Contracts
Regulations -- Imports
Currency Appreciation
Factor Costs -- Wages
Import Disruption (Sanctions/Trade Conflict)
Infrastructure Disruption or Shortage
Losses and Costs of Corruption
Losses and Costs of Crime
Skilled-Labor Shortages
Production Risk:
Contribution
to Risk
5 Years
20
Enforceability of Government Contracts
Ownership of Business by Nonresidents
Regulations -- Environmental
Regulations -- Imports
Import Disruption (Sanctions/Trade Conflict)
Infrastructure Disruption or Shortage
Losses and Costs of Physical Hazards
Input Risk:
Subjective
Probability
5 Years
Severity
Weight
1
22
GI assigns probability estimates to a
range of events that may impact cash
flows or asset values
Probabilities are independent of type of
business and investment
All events are clearly defined and stated
“Severity weights” indicate relative
importance to the investment and is
used to weight probabilities
(these are the same for all countries)
Set the correlations
- example
Correlations have been defined
between the underlying varaibles
behind the risk drivers
Correlations are stored and can be
changed within the worksheet
‘@RISK_correlations’ within
ERM_calcbook.xls
If entered correlations are not
consistent within a given correlation
matrix, @Risk will prompt an error
message and only run the simulation
with an adjusted correlation based
upon the entered correlations
New correlations can be entered using
the ‘@RISK – Model’ window to link
dependent @risk calculation cells
Risk Simulation and
Risk Reporting with ERM Model
Selection of the risk drivers to be simulated
Set drivers to “0” (off) or “1” (on) in
the circled columns of the
Calculation workbook
“RM_SIMControl“ sheet to isolate
and analyse the impact of specific
risks and consider groups of related
drivers (e.g. all strategic, market
and operational risk)
Each column of zeros and ones
corresponds to one simulation
scenario for which many iterations
will be performed
For accurate calculations, use 2,000
iterations, which takes a few
minutes per simulation to run
For rough tests, use 500 iterations
Insurance programmes and the
Market risk mean reversion
functionality can be turned on
(“Yes”) and off (“No”) (see bottom of
risk driver worksheet)
Excel screenshot may not reflect latest version of model
View simulated risk profiles and extract simulated data
ƒ
–
–
ƒ
–
–
ƒ
NB: Excel screenshot may not reflect latest version of model
After the simulations have been completed, the
outputs can be viewed with the following
worksheets
RM_Histogram :- Presents a probability
distribution of risk adjusted metrics together with
the mean and planned P&C data. Capable of
changing (i) the year (ii) metric (i.e. EBIT,
EBITDA etc.) and (iii) business unit or Group
RM_DriverReportVariance :- Presents a
waterfall diagram indicating individual
contribution of top 25 drivers to overall volatility.
Capable of changing (i) the year (ii) metric and
(iii) business unit or Group
Other reports include:
RM_TimeVariation :- For a selected metric and
business unit/Group, time variation of mean,
planned, 5th percentile and 95th percentile values
are plotted
RM_RiskReportVariance :- Similar to
RM_DriverReportVariance but plotted at the Risk
level (i.e. Decrease in market share, Adverse
Government Action etc.)
Analysis with these workbooks can be conducted
provided the simulation is conducted with the
same workbooks as the analysis and that both of
these workbooks are open
Risk Management framework – Reporting structure &
objectives
Reporting frequency
and receivers
Financial risk Management
Short term – 12 months horizon
month m 2
1
m3
m4
m5
m6
m7
m8
m9
m 10 m 11 month
12
•
Monthly update
•
FX risk
•
Report to the BoD and EB
•
Interest rate risk
•
Yearly update of model inputs,
quarterly progress report on risk
mitigation activities, ad-hoc
analysis in case of acquisitions
•
Strategic risks
Enterprise Risk Management
Strategic term – 10 years horizon
2007
2008
2009
2010
2011
2012
2013
2014
Business Continuity Management
Crisis Management
Contingency Planning
•
Report to the BoD, EB, Financial
and Risk Management Committee,
on relevant issues to the Internal
Audit and Head of BUs
•
Yearly information on the
renewal conditions
2015
Operational Risk Management
Insurance Management
Yearly renewal
Property Damage / Business Interruption
Liability Insurance (Third Party, Product,
Pollution and Aviation Product)
Wells insurance
Personal type insurance
Other types (Director & Officer Liability
Insurance, Fidelity (Crime) Insurance, etc.)
Key risk drivers concerned
• Commodity risk
•
•
(but financial and
operational risks
are also covered)
Operational risks
Report to the BoD and EB
•
Reports / information as
necessary
•
BUs, FUs are involved
•
Report to the EB and BMT
•
Operational risks
Risk Controlling Process
Finance and Risk
Management
Committee
Risk Identification
Reporting
4 reports within
a year
Mitigant
Action
Preparation
Mitigant Action
Monitoring
Reconciliation
of Actions
with BUs
Example for planned layout of regular risk reporting to the
senior management of the company
- Illustrative Risk driver contribution to Group risk (2006)3
Group EBITDA @ risk (2006)
%
4%
3%
5%
percentile
Mean
95%
percentile
2%
1%
0%
EBITDA 1
BN HUF
3
Risk
Risk driver
Financial
Market risk
Crude & Crack spread
25,00%
Financial
Market risk
FX
10,00%
Financial
Market risk
Gas price
10,00%
Strategic
Commercial risk
Counterparty risk
6,00%
Strategic
Adverse government
action
Revocation agreements
6,00%
Strategic
Geological
uncertainties
Overestimation of
Reserves
6,00%
Strategic
Market volume demand
Miles driven
6,00%
Operational
Operational disruption
Lack of proper
equipment
8,00%
Operational
Operational disruption
Inadequate
maintenance
8,00%
Others: 15%
Threshold: 3 %
Contribution to Group risk by BU
Petchem
15%
GasTr
10%
Lubes
15%
Strategic
risk
30%
R&M
30%
Contribution to Group
risk by risk type4
E&P
15%
1
2
3
Relative
contribution
Category
Retail
15%
All key metrics can be calculated (i.e. OCF, FCF, EBIT)
Operational risk calculated post insurance
All contribution calculations based upon the distance between the 5th and 95th percentile of the EBITDA distribution
Operation
al risk 2
20%
Financial
risk
50%
The risk driver contribution analysis supports the prioritisation
of key mitigation activities
- Illustrative Risk driver prioritisation & Mitigation tracking
ƒ
ƒ
ƒ
The risk driver analysis can
be used to identify risks that
are either exceeding limits or
where planned return does
not justify the level of risk
Risk
category
Risk
Risk driver
Financial
Market risk
Crude & Crack
Spreads
“Naturally” hedged by
R&M division
Financial
Market risk
FX
Hedging
The risk owners and Group
Risk Management can
together perform cost benefit
analysis to determine
optimised mitigation activities
Financial
Market risk
Gas price
Government lobby
Strategic
Commercial risk
Counterparty risk
Partner rating policy
review
Strategic
Adverse
Revocation
government action agreements
Government lobby,
negotiated agreements
These activities can then be
tracked in the regular risk
reports
Strategic
Geological
uncertainties
Overestimation
of reserves
Better processes and
technologies
Strategic
Market volume
demand
Miles driven
Looking for growing
markets
Operational Operational
disruption
Lack of proper
equipment
Better procurement and
control processes
Operational Operational
disruption
Inadequate
maintenance
Improved control
processes
Risk
owner
Actions to be taken
Progress
report
•
Not all risks should be mitigated – some of them may be chosen to be kept by the strategy of
the company
•
Risks should be managed at Group level and portfolio effects should be taken into account –
as some of the risks (e.g. oil price risk) are counterbalanced by other Business Units
How to use Enterprise Risk Management
(ERM) results
in key decision making processes
(i.e. capital allocation, KPIs,
strategic planning)
Limit setting: Risk Management limits are linked to Financial &
Strategic objectives
Besides systematic risk monitoring and elaboration of mitigation actions, some „simpler”
rules provide framework for decisions
Financial ratios and covenants
Other limits and guidelines
Loan Agreements contain the following measures
Net debt / EBITDA
EBITDA / Total Interest
Financing Headroom
Tangible Net Worth
a max. value of
ratio is set
min. values
are set
Currency denomination of debt
A threshold for min. ratio of € debts is set
Fixed/floating ratio of debt
A threshold for max. ratio of fixed debts is set
Country limits (especially for E&P projects)
For each country a maximum of value of capital
employed is set (however, there can be
exemptions if meet predefined requirements,
like risk mitigations i.e. partner involvement)
Roles of Group Risk Management
-
-
calculates the above mentioned limits (on a 12-month forward basis)
monitors the market and its impact on the covenants and limits
calculates the probability of breaching any covenant for the next couple of quarters
above the „natural” hedge, GRM proposes the necessary transactional steps (i.e. options, swaps) and executes
the transactions
prepares monthly reports to the senior management
report guidelines (e.g. for country limits) are elaborated by Group Risk Management
One of the future results of ERM project can be the inclusion of some new limits
MOL started its ERM project in 2005, is well on track with sound
quantitative capabilities required for future strategic applications
Capital allocation
F
e
ur
t
u
m
op
l
ve
De
M
ER
d
m
op
l
e
ev
t
en
05
20
Risk based approval criteria for budgeting/capex
allocation
Key risk indicators integrated as management
KPIs
ts
en
Risk appetite
Fully defined risk appetite linked to strategic
planning
Alignment of risk-taking capacity with strategic
goals
Decision support
Develop risk mitigation plans based on
quantification output
Use quantitative risk metrics to improve decisionmaking by optimising risk-return trade-offs
Full portfolio model
rollout required in 2006
Risk quantification and ERM rollout
Quantification of all risks, across all business units
ERM concept rolled out across MOL
GRM team in place and trained
Risk identification and concept
development
Identify key risks and underlying drivers
Define ERM concept (reporting, link to
processes, organisational support)
Enterprise Risk
Management rollout required
Group Risk Management (GRM)
organisation implemented and risk
pyramid created and validated
Level of completion
to date
Risk quantification outputs can be used to support enhanced
decision making and performance optimisation
Enhanced decision-making at
group level
Risk appetite & group level portfolio
optimisation
A company requires a clear understanding of
the earnings volatility it will accept and its
overall risk taking capacity and link this with
risk-return portfolio optimisation to optimize
capital allocation
Balance sheet management
Optimal financing structure can determined,
given the strategy and risk appetite
Risk adjusted WACC/KPI
Business unit risk metrics should be used to
more effectively determine the contribution of
each business unit to shareholder value
Optimised mix of assets,
appropriately funded
Improved performance at business
unit level
Business Unit portfolio optimisation
The same portfolio optimisation and risk
appetite tools can be used to manage riskreturn position of individual BUs (especially for
International Upstream projects)
Mitigation optimisation
Translate risk quantification from the Risk
Pyramid into operational improvements and
improved mitigation actions that will improve
the risk-return position of the affected BU
Risk adjusted performance measurement
Develop and incorporate risk based key
performance indicators (KPI) to ensure that
risk-return decision-making is employed at the
group, business unit and individual level
Value of each individual
asset optimised
Results of risk quantification can be used both at group-wide and
at separate Business Unit (especially E&P) portfolio development
Risk-return portfolio optimisation of different
projects
Return
„
– Illustrative –
1/t
NPV + PV(CAPEX)
„
-1
PV (CAPEX)
Efficient frontier
„
M
Link to risk
appetite
K
ERM model can calculate risk metrics for each
project across all relevant risks from the Risk
Pyramid
Current projects can all be positioned within the
risk-return portfolio – Project groupings (e.g.
regions) can be used
Integrate risk adjusted project NPV as part of
valuation process
Target portfolio
J
A
Outcomes:
P
Current Portfolio
D
„
Z
F
„
„
„
NPV @ risk / NPV
Risk
Ensures a consistent approach to determining risk
in project valuations
Define proper limits
Risk based hurdle rate for each project to improve
selection
Ensure a risk-return portfolio optimisation
approach to projects (i.e. only selecting high return
projects does not necessarily mean a good
portfolio)
Tail end losses mitigated by insurance program while small
scale losses are typically below deductible and retention
Group EBITDA Volatility – Operational Risk Based on ERM Model
ƒ Small scale losses driven by
key unit breakdowns and
frequently occurring events
(i.e. 1-2 day shutdowns)
ƒ Tail event losses: up to USD X
million corresponding to the
occurrence of tail events –
Current insurance programs
cover USD Y million across the
group
ƒ EBITDA does not fall below
USD Z million with 95%
probability
Learnings of ERM rollout process - so far so good
During 2005 extensive knowledge transfer has taken place (via Pilot phases) as the new Group Risk
Management team has worked closely with the ERM risk model and has actively been involved in the
risk quantification methodologies process (elaboration of the model and processes was supported by
a consulting firm last year)
ERM roll out has commence in Q1, 2006 and focuses on quantifying operational strategic risks
across all business units (one-by-one, now we are at the 3rd division after evaluating R&M and E&P)
Financial (especially market) risks had been handled already before implementing ERM at MOL, so
bulk of work in that field was „only” incorporating such risks into the unified ERM concept
ERM risk reporting at Group and business unit level will begin in H2, 2006
Our experience working with the business teams has shown that the interactive and inclusive style of
risk quantification and input/methodology validation is very successful in gaining confidence
A successful rollout program ensures:
Confidence and acceptance by the businesses of the risk metrics
Once the basis risk quantification approach is 'bedded down' it can serve as the foundation for
applications focussed on optimising the risk-return trade-off
The continued culture shift within the company MOL towards 'risk-return' decision-making at all
levels
Conclusions – Main benefits of implementing ERM
ERM …
… spreads Risk Management knowledge and awareness („risk
culture”) across all Business Units
… helps senior management, Board and BU executives to focus on
main risks and mitigants
… provides a systematic review (quarterly reports) to monitor
progress
… can be integrated into decision making processes (e.g. capital
allocation, portfolio building, performance management) in order to
increase shareholder value
Thank you for the attention !